The government will find out March 12 how much it must pay Glendale Federal Bank for eliminating regulatory goodwill, a favorable accounting treatment granted to acquirers of failed thrifts.
A ruling had been expected this month, but Chief Judge Loren A. Smith of the Federal Claims Court on Tuesday said he has been too busy handling administrative matters to finish the opinion.
Addressing more than 60 lawyers at a status conference on the goodwill cases, Judge Smith said he will issue the Glendale opinion at 5 p.m. Friday, March 12. This is to give investors the weekend to digest the ruling before the markets open on March 15, the judge said.
Though the damages decision will involve only a single thrift, experts said the ruling will establish a precedent that could apply to about 100 similar claims. Total damages could top $20 billion.
"This is going to be a proxy for the other companies," said Thomas O'Donnell, an analyst at Salomon Smith Barney. "It will be used as a gauge for all the cases."
The goodwill disputes stem from the 1980s, when a nearly bankrupt Federal Savings and Loan Insurance Corp. enticed healthy thrifts to acquire their ailing peers by promising to let them count the difference between the sick institutions' assets and liabilities as capital for up to 40 years.
Congress, upset over the use of an accounting manipulation, voided these agreements in the 1989 thrift bailout law. This left these thrifts undercapitalized, causing scores of them to fail and the rest to scramble for more capital.
Glendale Federal Bank and more than 100 other thrifts sued the government for breach of contract. The Supreme Court in 1996 ruled that the government was liable for breaking its word. It sent Glendale's case back to Federal Claims Court to decide how much, if anything, the government should pay in damages.
Throughout the two-year trial, which included long breaks without testimony, Chief Judge Loren A. Smith has urged the government to settle. The judge has gone as far as saying that Glendale has presented one of the strongest cases he has ever seen. Yet the government has refused to settle goodwill claims, except for a few small cases.
The judge must decide among three theories of damages. Glendale argued at the trial for the "lost profits" theory, which holds that the government should pay Glendale the amount it could have earned but for the loss of goodwill. This would exceed $1 billion.
Alternatively, Glendale argued it was entitled to restitution, or the amount the government would have spent to resolve the sick thrift's failure without Glendale's help. This would include interest the government would have had to pay on the bonds used to finance the rescue. This tab also could exceed $1 billion.
The final damages theory is called reliance, which means the government would have to pay Glendale for the amount it spent to recover from the loss of goodwill. This is the least lucrative option for Glendale, and it is expected to total significantly less than $1 billion.
Judge Smith's decision also could have a serious impact on California Federal Bank, whose trial starts Monday. But Federal Claims Court Judge Robert H. Hodges Jr. already has ruled that the thrift may not present evidence on the "lost profits" theory, and he severely limited discussion of the restitution theory. (California Federal's parent merged last year with Glendale's, Golden State Bancorp.)
California Federal is expected to appeal Judge Hodge's decision, said lawyers following the case. If the March opinion in Glendale's case accepts either theory, California Federal would have a stronger case.
However, lawyers expect the government to appeal Judge Smith's ruling, eventually landing the case before the Supreme Court for the second time.
"This case is going to go on forever," one lawyer said.